The interest for the common man in the Union Budget is largely to the extent of whether or not we will be better off in terms of tax payments and prices, and whether there are any concessions to be had in terms of financial investments. Fiscal prudence is more of an academic exercise which appeals to the intellectual or critic but may mean less to the man on the street who has to contend with problems of high inflation and is not really directly interested in a more sound fiscal deficit number.
Presently we have had relentless inflation at over 10% per annum (going by the CPI) in the last 2 years. Incomes are not increasing commensurately though stock markets continue to do well. This being the case we as citizens have had less purchasing power while those who also operate in the stock markets have gotten relatively better returns as well as paid lower taxes, as capital gains taxes are favorable in the equity segment.
The government has limited flexibility when it comes to tinkering with tax rates. We are committed to having the Direct Tax Code (DTC) implemented as well introducing the Goods and Services Tax (GST) after the states agree to the compensation formula. Therefore, any changes in the tax rates will have to be within the confines of these two codes.
Two issues are bound to come up for income tax. The first is the tax exemption limit will probably be increased by 10% which will help adjust for inflation. In fact, ideally just like how capital market gains are indexed with inflation based on the CPI so should the tax exemption level. Second, with talk on taxing the rich being the flavour of the season, a surcharge on incomes above a threshold would be on, and the only element of conjecture would be the definition of the super rich. Would it be Rs 20 or Rs 50 Lakhs per annum? The FM will have a final say here.
The excise and customs rates would remain largely unchanged for most goods, and the two areas that could attract attention could be gold and consumer goods for higher customs rates. With the country’s current account deficit being under pressure, it is but natural that gold imports will be discouraged further through duty enhancement. Consumer goods, especially food items could also come under this thought process. Also the service tax would be extended to more services, tough at the margin collections do not increase commensurately as these services are in the unorganized sector and difficult to trace.
The capital market has always been regarded as the barometer of economic success. Governments try hard to woo investors as a robust market means more funds coming in which helps investment and growth. Here there is likely to be some action. There could be a reduction in the STT for non delivery based trades. Further, the RGESS equity scheme would be extended for a longer time period with larger coverage in a bid to get in financial savings which have been dipping in the recent past. This combined with the reintroduction of tax free infrastructure bonds could be realistically expected in this Budget. As financial savings in the country are coming down, the FM may hike the limit for savings in specified instruments including insurance, provident funds, long term deposits etc by Rs 20,000.
The rest of the budget would be more on getting the fiscal arithmetic right. This would mean lowering the fiscal deficit ratio for the year which in turn will have a bearing on the government’s borrowing programme and future course of monetary policy. A lower deficit can be a precursor to the RBI leering rates in the course of the year, which will be beneficial for industry and investment. This will mean further rationalization of expenditure more in the area of subsidies. The fuel subsidy bill will be checked with the decision already taken to price diesel at market levels. With the impending elections in 2014, and the food security hill to be passed this year, food subsidy will be high on the agenda with the silver lining being that the large stock of food with the FCI would provide substantial cover for the first two years even when implementing the programme.
Therefore, in short we should not expect much in the budget. The thrust will be on fiscal discipline with some tax concessions provided on the way to assuage the middle class. Expenditure rationalization which has already commenced will continue, albeit gradually but ensuring all the time that the fiscal numbers look satisfactory.
(Views are personal)
Madan Sabnavis
(Chief Economist, CARE Ratings)
